Production Possibility Curve (Explained with Diagram)

The production possibility curve represents graphically alternative production possibilities open
to an economy.

The productive resources of the community can be used for the production of various alternative
goods.

But since they are scarce, a choice has to be made between the alternative goods that can be
produced. In other words, the economy has to choose which goods to produce and in what
quantities. If it is decided to produce more of certain goods, the production of certain other goods
has to be curtailed.

Let us suppose that the economy can produce two commodities, cotton and wheat. We suppose
that the productive resources are being fully utilized and there is no change in technology. The
following table gives the various production possibilities.

It all available resources are employed for the production of wheat, 15,000 quintals of it can be
produced. If, on the other hand, all available resources are utilized for the production of cotton,
5000 quintals are produced. These are the two extremes represented by A and F and in between
them are the situations represented by B, C, D and E. At B, the economy can produce 14,000
quintals of wheat and 1000 quintals of cotton.

At C the production possibilities are 12,000 quintals of wheat and 200u quintals of cotton, as we
move from A to F, we give up some units of wheat for some units of cotton For instance, moving
from A to B, we sacrifice 1000 quintals of wheat to produce 1000 quintals of cotton, and so on.
As we move from A to F, we sacrifice increasing amounts of cotton.

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This means that, in a full-employment economy, more and more of one good can be obtained
only by reducing the production of another good. This is due to the basic fact that the economy’s
resources are limited.

The following diagram (21.2) illustrates the production possibilities set out in the above table.

In this diagram AF is the production possibility curve, also called or the production possibility
frontier, which shows the various combinations of the two goods which the economy can
produce with a given amount of resources. The production possibility curve is also called
transformation curve, because when we move from one position to another, we are really
transforming one good into another by shifting resources from one use to another.

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It is to be remembered that all the points representing the various reduction possibilities must lie
on the production possibility curve AF and not inside or outside of it. For example, the combined
output of the two goods can neither be at U nor H. (See Fig. 21.3) This is so because at U the
economy will be under-employing its resources and H is beyond the resources available.
production Possibility Curve: Use # 1. Unemployment:
If we were to relax the assumption of full employment of resources, we can know the level of
unemployment of resources in the economy. Such a situation is depicted in Figure 3 where the
curve PP depicts substantial unemployment in the economy.

It implies either idle resources or inefficient use of resources within the economy. The economy
can attain the full employment level by utilizing its resources fully and efficiently. At the level of
full- employment the economy can have more of capital goods at point B, or more of consumer
goods at point C, or more of both the goods at point D.

Production Possibility Curve: Use # 2. Technological Progress:

Technical progress enables an economy to get more output from the same quantities of
resources. By relaxing the assumption of given and constant production with the help of the
production possibility curve the increase in the production of both the goods than before.

Suppose the economy is producing certain quantities of consumer goods and capital goods as
represented by the production possibility curve PP0 in Figure 4. Given the supplies of factors, if
the productive efficiency of the economy improves by technological progress, its production
possibility curve will throughout shift outwards to P1 P1 .It will lead to the production of more
quantities of both consumer and capital goods, as shown by the movement from point A on
PP0 curve to point С on P 1P1 curve.
If technical progress takes place in the production of only one of the two goods, say consumer
goods, the new production possibility curve will be PP1 in Figure 4. It may be noted that even
though technical progress is limited to one product, it enables the economy to have more of both
goods.
Increased productivity in consumer goods industry makes it possible to increase the output of
this industry. At the same time, it releases resources which can be employed to raise the output
of capital goods. Figure 5 shows that technical progress brings about a greater increase in capital
goods than in consumer goods CD > AB, while Figure. 6 shows a greater increase in consumer
goods than in capital goods, AB > CD.

Production Possibility Curve: Use # 3. Economic Growth:

By relaxing the assumptions of the fixed supply of resources and of short period, the production
possibility curve helps us in explaining how an economy grows. The supplies of resources like
land, labour, capital and entrepreneurial ability are fixed only in the short run.

Development being a continuous and long run process, these resources change over time and
shift the production possibility curve outwards as shown in Fig. 7.

If the economy is stagnant at, say point S, economic growth will shift it to point A on the
production possibility curve PP, and a further increase in the resources may shift the production
possibility curve towards the right to P1P. The economy will produce at point C. Why point С?
Because when there is economic growth, the economy will have larger quantities of both
consumer and capital goods than before.